Banks Eye Higher Card Revenues As Customers Spend More Freely

U.S. banks have had to contend with considerable changes in the way they make money since the economic downturn of 2008, as stricter regulatory requirements and tighter scrutiny of their operating practices forced them to rethink some of their most lucrative revenue sources. While the banks’ trading operations have drawn the most flak over the years, it was the card business that was the first to witness a major regulatory clampdown. Credit cards came under the scanner first when the Credit CARD Act of 2009 and other Federal Reserve rules capped interest rates and fees while abolishing several practices seen as onerous to card users. Limits to debit card fees soon followed as a part of the Durbin Amendment. Coupled with a slowdown in economic conditions, which saw shrinking net interest margins as well as a reduction in discretionary spending, this led to a marked decline in card-related revenues at the big banks.

However, things have been upbeat since mid-2011 for the banks, as improved economic conditions allowed cardholders to be more liberal with their discretionary spending. This in turn helped banks grow their card loan portfolio as well as their transaction-based fee revenues. The country’s four largest banks in terms of outstanding credit card loans – Citigroup, JPMorgan Chase, Bank of America and Capital One – have seen steady improvements in their card fees over recent quarters thanks to swelling card payment volumes. In this article, we detail the growth in card payments for these banks over the last ten quarters and also hint at the trends one can expect from card fees in the near future.

Banks earn a fee equal to a percentage of the transaction value each time a customer swipes his or her card, and the only avenue of growth in card fees for banks following the regulatory clampdown is growth in purchase volumes. And each of these banks has reported notable improvement in card purchase volumes over the last three years. The table below summarizes the card purchase volumes for these four banks in each of the last ten quarters. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements

(in $ billions)

Q1’12

Q2’12

Q3’12

Q4’12

Q1’13

Q2’13

Q3’13

Q4’13

Q1’14

Q2’14

Bank of America

107.8

113.9

112.3

117.8

111.3

119.7

119.5

122.5

114.8

123.1

JPMorgan

86.9

96.0

96.6

101.6

94.7

105.2

107.0

112.6

104.5

118.0

Citigroup

85.4

90.5

87.7

94.8

83.9

91.2

90.2

99.3

85.4

95.1

Capital One

34.5

45.2

48.0

52.9

45.1

50.8

50.9

54.3

47.4

56.3

Total

314.6

345.6

344.6

367.1

335.0

366.9

367.6

388.7

352.1

392.5

These four banks reported almost $400 billion in total payments made by customers using cards issued by them in Q2 2014 – making this the best quarter in this regard since the economic downturn of 2008. Notably, cards issued by Bank of America have a higher purchase volume in each quarter despite the bank ranking third in terms of outstanding card loans (after Citigroup and JPMorgan). This points to a much higher usage of Bank of America’s debit cards relative to its competitors. The considerably lower figure for Capital One compared to the other three banks can be explained by the fact that the bank does not have many debit cards in circulation due to its credit card-focused business model.

The seasonal nature of card purchase volumes (credit as well as debit cards) is also evident from the table above, which shows that Q1 is the slowest while Q4 is the strongest. The primary reason for the fourth quarter’s strength is that the holiday season sees the highest amount of customer spending, followed by a period of lull in the first quarter. The chart below makes it easier to notice this trend, while also giving a clearer picture of how these banks fare with respect to each other.

The increase in spending levels over this period is what is key to higher revenues for the banks over coming years. The chart shows how card payment volumes have grown between 6% and 7% year-on-year in each of the quarters since Q1 2012. We believe that this 6-7% annual increase in purchase volumes will continue over coming years. But a faster-than-expected improvement in economic conditions could boost card usage at a faster rate. In such a scenario, the impact on the share value of Capital One can be understood by making changes below.

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